Tencent Wins Moral Victory Over Qihoo

Tencent wins courtroom victory against Qihoo

Moral justice is the big victor in a courtroom drama between Internet giant Tencent (HKEx: 700) and security software specialist Qihoo 360 (NYSE: QIHU), which has just ended with a guilty verdict against Qihoo for unfair competition. This new ruling comes just a month after another court ruled in Tencent’s favor in a similar but separate case where it was accused of unfair competition by Qihoo. What all of this shows is that China’s court system is becoming more sophisticated in settling business disputes, and can now make strong judgments to stop illegal behavior after it occurs. But the courts are still largely ineffective at discouraging such behavior in future cases, since Chinese law usually severely limits the size of damages for most transgressions.This latest verdict against Qihoo ends a drama that dates back nearly 3 years, when the 2 companies first became embroiled in a series of tussles that resulted in the filing of the 2 lawsuits. In this latest lawsuit, Tencent had accused Qihoo of unfair competition stemming from a 2010 incident that led to major business disruptions for Tencent caused by a Qihoo product.

The Guangdong court hearing the case has ruled that Qihoo did indeed engage in unfair competition. (English article; Chinese article) But not surprisingly, Qihoo was ordered to only pay 5 million yuan in damages, or a fraction of the 125 million yuan that Tencent had requested. That 5 million equals less than $1 million, and won’t make a huge difference for Qihoo, a US-listed company with a market capitalization of $4 billion and annual revenue of more than $300 million.

In an interesting twist, the court also ordered Qihoo to post an apology on its website, and to publish prominent ads in other media outlets for 15 consecutive days. Perhaps the court realizes that its punitive fines will have little if any effect at discouraging future similar behavior by companies like Qihoo, which have a reputation for their aggressive and sometimes questionable business tactics.

So in that light, perhaps the court believes the loss of “face” and reputational damage that Qihoo will suffer as a result of having to make such a big public apology will help to discourage it from similar actions in the future. I should commend the courts for trying this approach, though I have doubts about the effectiveness of forcing companies like Qihoo to issue such high-profile apologies. Instead, I expect Qihoo will probably find a way to bury the apology on its own website, and will also find ways to avoid admitting wrongdoing in any major Chinese media.

Qihoo’s loss in this case comes just a month after it also lost another case in which it accused Tencent of abusing its dominant position in violation of Chinese anti-monopoly laws. (previous post) In that case, another judge in Guangdong province rejected all of Qihoo’s claims and ordered it to pay 790,000 in legal fees.

So let’s do a little math here, and we can calculate that Qihoo’s direct losses from these 2 lawsuits total a tidy 5.8 million yuan, or around $935,000. That certainly doesn’t seem like a very stiff penalty for a company that now generates about $1 million a day in revenue, and I fully expect Qihoo to resume its unscrupulous ways that could result in more similar lawsuits in the years ahead.

But at the end of the day, I do have to praise the courts for giving a pair of thoughtful and just decisions, showing they can act as impartial and fair arbitrators in business disputes. Now Beijing just needs to give its judges some better tools so the courts can use their rulings to deter companies from illegal actions.

Bottom line: A verdict against Qihoo in a lawsuit by Tencent reflects growing sophistication by Chinese courts at handling business disputes.